Introduction to Supply Chain Management
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  • What is shown here is how divergent these various forecasts are in relation to real demand. <br /> Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market <br />
  • What is shown here is how divergent these various forecasts are in relation to real demand. <br /> Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market <br />
  • What is shown here is how divergent these various forecasting are in relation to real demand. <br /> Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market <br />
  • In capital markets, foreign goods have over 40% penetration <br /> In 1970, US Market accounted for 40% of “typical product bundle”, today less than 30 % <br /> Any BW article, companies are pointing to foreign sales to fuel growth <br /> Defensive tool: Kellog’s and Nestle’s have large market shares in home countries, <br /> implicit agreement not to compete overseas <br />

Introduction to Supply Chain Management Introduction to Supply Chain Management Presentation Transcript

  • Introduction to Supply Chain Management Professor Guojun Ji University of Washington, GTTL 1
  • Motivation of Supply Chain Evolution  Short life cycle  heightened expectations of customers  advances in communication and transportation technologies  mobile communication  overnight delivery 2
  • Supply Chain Components  Suppliers  Manufacturing centers  Warehouses  Distribution centers  Retail outlets  Raw material  Work-in-Process inventory  Finished products 3
  • Logistics Network Sources: Regional plants vendors ports Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs
  • Network Design The Key Issues: 1. Number of warehouses 2. Location of each warehouse 3. Size of each warehouse 4. Allocation of products to the different warehouses 5. Allocation space for products in each warehouses 6. Allocation of customers to each warehouse 5
  • Network Design The objective is to balance service level subject to:  Production/ purchasing costs  Inventory holding costs  Facility costs (storage, handling and fixed costs)  Transportation costs (different transportation mode) That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels. 6
  • The More Warehouse, the more ...  Improvement in service level  inventory costs due to increased safety stock  overhead and setup costs  reduction in outbound transportation costs (from warehouses to customers)  inbound transportation costs (from plants to warehouses) 7
  • Inventory (1/2)  Where do we hold inventory?  Suppliers and manufacturers  warehouses and distribution centers  retailers  Types of Inventory  WIP  raw materials  finished goods 8
  • Inventory (2/2)  Why do we hold inventory?  Uncertainty in customer demand short life cycle implies that historical data may not be available many competing products in the marketplace  Uncertainty in quantity and quality of the supply, supplier costs, and delivery times  Economies of scale offered by transportation companies 9
  • Supply Chain Management   Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service level requirements. Notice:  Everyone is involved  Systems approach to reducing costs 10 
  • Conflicting Objectives in the Supply Chain 1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost 11
  • Conflicting Objectives in the Supply Chain 3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices 12
  • The Effect of Demand Uncertainty (1/2)  Most companies treat the world as if it were predictable:  Production and inventory planning are based on forecasts of demand made far in advance of the selling season  Companies are aware of demand uncertainty when they create a forecast, but they design their planning process as if the forecast truly represents reality 13
  • The Effect of Demand Uncertainty (1/2)  Recent technological advances have increased the level of demand uncertainty:  Short product life cycles  Increasing product variety  The three principles of all forecasting techniques:  Forecasting is always wrong  The longer the forecast horizon the worst is the forecast  Aggregate forecasts are more accurate 14
  • Risk Pooling  Consider these two systems: Warehouse One Market One Warehouse Two Market Two Supplier LT = 1 week Supplier Market One Warehouse 1500 products, 10000 accounts 15Market Two
  • Risk Pooling    For the same service level, which system will require more inventory? Why? For the same total inventory level, which system will have better service? Why? What are the factors that affect these answers? 16
  • Order Size The Dynamics of the Supply Chain Customer Customer Demand Demand Distributor Orders Distributor Orders Retailer Orders Retailer Orders Production Plan Production Plan Time 17 Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
  • Order Size What Management Gets... Customer Customer Demand Demand Production Plan Production Plan Time 18 Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
  • Volumes What Management Wants… Production Plan Production Plan Customer Customer Demand Demand Time 19 Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
  • The Bullwhip Effect 2 Var (Q) 2L 2L ≥ 1+ + 2 Var ( D) P P 20
  •   The bullwhip effect is an extreme change in the supply position upstream generated by a small change or no change in customer demand. Inventory can shift quickly from being highly backordered to being excess. Observations show that the variation of inventory and order quantities increases up the supply chain from customer to supplier. In addition, the longer the lead times of goods, date, and control flow are, the stronger the bullwhip effect is. Figure shows this effect. 21
  •  A famous example, analyzed and published by Procter&Gamble, is demand for Pampers disposal diapers. The bullwhip effect is caused mainly by information processing obstacles in the logistics network; the obstacles are information time lag and distortion (by the actual orders). An appropriate countermeasure is adapting manufacturing lead times (see here [Solo03]), based on rapid information exchange on consumption, or demand, by point-of-sale scanning. 22
  • Var(q)/Var(D): For Various Lead Times 14 L=5 12 10 L=3 8 6 L=1 L=1 4 2 0 0 5 10 15 20 25 23 30
  • The Dynamic Supply Chain  Increasing customer power leads to increased demands on retailers  Increased retailer power leads to increased demands on suppliers 24
  • Example 1 A Korean manufacturer of electrical products is facing:  70% service level  4 turnover rate  Leading electronic companies:  9 turnover rate 25
  • Supply Chain: The Magnitude  In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product).  Transportation 58%  Inventory 38%  Management 4%  Third party logistics services grew in 1998 by 15% to nearly $40 billion 26
  • Supply Chain: The Magnitude  Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them.  In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays. 27
  • Supply Chain: The Potential  Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997) 28
  • Supply Chain: The Complexity National Semiconductors: • Production: Produces chips in six different locations: four in the US, one in Britain and one in Israel – Chips are shipped to seven assembly locations in Southeast Asia. • Distribution – The final product is shipped to hundreds of facilities all over the world – 20,000 different routes – 12 different airlines are involved – 95% of the products are delivered within 45 days – 5% are delivered within 90 days. 29 –
  • Supply Chain: TheIntegration (network) Complexity 1. Supply Chain • Conflicting Objectives • The Dynamics of the Supply Chain 2. Matching Supply and Demand 3. System Variations over Time (parameters) 4. Status of Logistics Knowledge • Many problems are new • Incomplete understanding of issues • Methodology is rather narrow • No historical data available 30
  • Example 2  National semiconductor:  one of the world’s largest chipmakers  short lead time  In 1994, 95% demands received within 45 days, the remaining 5% received within 90 days  12 different airline carriers  20,000 different routes  Who will be in the lucky 5%? 31
  • ISSUES: Decision Classification  Strategic Planning: Decisions that typically involve major capital investments and have a long-term effect. 1. Determination of the number, size and location of new plants, distribution centers and warehouses 2. Acquisition of new production equipment and the design of working centers within each plant 3. Design of transportation facilities, communications equipment, data processing means, etc. 32
  • ISSUES: Decision Classification  Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months 1. Purchasing and production decisions 2. Work-force size 3. Inventory policies 4. Definition of the distribution channels 5. Selection of transportation and trans-shipment 33 alternatives
  • ISSUES: Decision Classification  Operational Control: Includes day-to-day operational decisions 1. The assignment of customer orders to individual machines 2. Dispatching, expediting and processing orders 3. Vehicle scheduling, routing 34
  • ISSUES: Distribution Strategies  The structure of the distribution network  The distribution strategy  The Classical Strategy  Cross Docking (Wal-Mart)  Direct Shipping  merge-in-transit 35
  • Integration and Strategic Partnering  Successful Keys:  Information sharing  Operational planning  What information should be shared?  How should it be used? 36
  • Advantages of Alliance (1/2)  Adding value to product  Improve time to market, distribution times, repair times,  complementary product lines  Improving market access  better advertising  new market channels  Strengthening operations  complementary seasonal products 37
  • Advantages of Alliance (2/2)  Adding technological strength  Enhancing strategic growth: overcome barriers  Enhancing organizational skills: organization learning  Building financial strength  shared administrative costs  reduced owing to the expertise 38
  • Disadvantages of Alliance  IBM entered the PC market in 1981.  Outsourcing:  CPU: Intel  OS: Microsoft  Market share:  1985: 40%  1995: 8%; Compaq: 10% 39
  • Types of Strategic Alliances  Third-Party Logistics (3PL)  Retailer-Supplier Partnerships (RSP)  Distributor Integration (DI) 40
  • Types of Retailer-Supplier Partnerships (RSP) Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling. 41
  • Types of Retailer-Supplier Partnerships (RSP)  Continuous Replenishment (rapid replenishment): Vendors receive POS data and use it prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.  Wal-Mart, Kmart 42
  • Types of Retailer-Supplier Partnerships (RSP)  Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.  Kmart 43
  • Types of Retailer-Supplier Partnerships (RSP)  Vendor Managed Inventory (VMI) (Vendor Managed Replenishment, VMR) :  The supplier decide on the appropriate inventory levels of each products and the appropriate inventory policies.  The goal of VME is to eliminate retailers’ orders.  VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements. 44
  • Increasing Globalization     1/5 of output of US firms produced abroad US Companies hold $500 Billion in foreign asset stocks (7% annual growth) 1/4 of US imports between foreign affiliates and US parent companies Over half of US companies increased the number of countries in which they operate (late 80’s to early 90’s) 45
  • Taxonomy of International Supply Chains (1/2)  International distribution:  domestic: manufacturing  overseas: marketing  International suppliers:  domestic: final assembly  overseas: raw materials, components, marketing 46
  • Taxonomy of International Supply Chains (2/2)  Off-shore manufacturing  domestic: warehouses, marketing  overseas: manufacturing  Fully integrated global supply chain  product are produced, manufactured, and distributed from various facilities located throughout the world  supply chain was designed without regard to 47 national boundaries
  • Forces Driving Globalization  Global Market Forces  Technological Forces  Global Cost Forces  Political and Economic Forces 48
  • Global Market Forces  Foreign competition in local markets  pressures by foreign competitors  opportunities by foreign customers  Growth in foreign demand  Global presence as a defensive tool  Nestle’s and Kellogg’s  Global proliferation of information:  overnight mail, internet  Presence in state-of-the-art markets  Japan -- consumer electronics 49  Germany -- machine tools
  • Technological Forces  Diffusion of knowledge  Many high tech components developed overseas  Need close relationships with foreign suppliers  Gain access to technology or markets:  joint location collaborations  Global location of R&D facilities  Close to production (as cycles get shorter) 50  Close to expertise (Indian programmers?)
  • Global Cost Forces  Low unskilled labor cost  Diminishing importance (offset by operating facilities costs in remote locationas)  Other cost priorities  Integrated supplier infrastructure  Skilled labor  Capital intensive facilities  government actions: tax breaks, cost sharing  joint ventures 51  price breaks
  • Political and Economic Forces (1/2)   Exchange rate fluctuations and operating flexibility Regional trade agreements (Europe, North America, Pacific Rim)  Value of being in a country in one of these regions  Implications for supply network design  Reevaluation of foreign facilities (Production processes designed to avoid tariffs) 52
  • Political and Economic Forces (2/2)  Trade     protection mechanisms Tariffs (finished goods) Quotas Voluntary export restrictions: Lexus, Infiniti Local content requirements TI/Intel factories in Europe Japanese automakers in the EU  Health/environmental regulations Japanese refused to import US skis (different snow)  Government procurement policies Up to 50% advantage for American companies on US 53 Defense contracts
  • Issues In Global SCM  Regional vs. International Products  regional-specific products: cars  true global products: Coca-cola, McDonald  Local Autonomy vs. Central Control  Short term expectations  Miscellaneous dangers  harder to administer offshore facilities  cheap labor masks the low productivity  collaborators become competitors 54
  • Regional Differences in Logistics (1/2)  Culture differences:  beliefs and values  customs  languages  Infrastructure  highway systems, ports, communication and information systems  road widths, bridge heights, communication protocols  geography distances 55
  • Regional Differences in Logistics (2/2)  Performance expectation and evaluation:  formal partnership contract  operating standards  Information system availability:  POS, automation tools, PC, EDI  Human resources:  managerial personnel  technical personnel  unskilled labors 56
  • Design For Logistics  Design for Logistics uses product design to address logistics costs  Key Concepts of Design for Logistics  Economic packaging and transportation  Concurrent/Parallel Processing  Postponement 57
  • Economic Transportation, Storage, and Transportation  Design products so that they can be efficiently packed and stored  Packed more compactly  Design products to efficiently utilize retail space  Design packaging so that products can be consolidated at cross docking points 58
  • Examples  Ikea  World’s largest furniture retailer  131 stores in 21 countries  Large stores, centralized manufacturing, compactly and efficiently packed products  Rubbermaid  Clear Classic food containers - designed to fit 14x14” Wal-Mart shelves 59
  • Concurrent / Parallel Processing  Objective is to minimize manufacturing lead times  Achieved by redesigning products so that several manufacturing steps can take place in parallel  Modularity/Decoupling is key to implementation  Enables different inventory levels for 60 different parts
  • The Network Printer Example Board Stage 1 (Europe) Stage 1 (Europe) Printer Customer (Europe) Stage 2 Integration (Far East) Board Printer Stage 2 (Far East) Customer (Europe) Plastics, motors, etc. Integration (Europe) 61
  • Traditional Manufacturing  Set schedules as early as possible  Use large lot sizes to make efficient use of equipment and minimize costs  Large centralized facilities take advantage of economies of scale 62
  • It is hard to be flexible when...  Lead times are long  Retailers are committed to purchasing early orders  Purchasing plans for raw materials are based upon extrapolating from 10% of the orders 63
  • Postponement   Manufacturing process starts by making a generic or family product which is later differentiated into a specific end product. Concepts of implementing delayed differentiation:     resequencing commonality modularity standardization 64
  • Resequencing: Benetton Old Manufacturing Process Spin or Purchase Yarn Dye Yarn Finish Yarn Manufacture Garment Parts Join Parts 65
  • Resequencing: Benetton New Manufacturing Process Spin or Purchase Yarn Manufacture Garment Parts Join Parts Dye Garment Finish Garment This step is postponed 66
  • Benetton Postponement  Why the change?  The change enables Benetton to start manufacturing before color choices are made  What does the change result in?  Delayed forecasts of specific colors  Still use aggregate forecasts to start manufacturing early  React to customer demand and suggestions  Issues with postponement  Costs are 10% higher for manufacturing  New processes had to be developed  New equipment had to be purchased 67
  • Postponement: Key Concepts  Delay differentiation of products in the same family as late as possible  Enables the use of aggregate forecasts  Enables the delay of detailed forecasts  Reduces scrapped or obsolete inventory, increases customer service  May require new processes or product design with associated costs 68
  • Information Technology  Competitive advantage through advanced IT  Banking  Retail (Wal-Mart - satellite connected IT)  Airlines (American Airlines Reservation System, Sabre)  Trucking and Shipping (FedEx - tracking) 69
  • Goals of IT in SCM (1/3)  Collect and store information on each product from production to delivery/purchase point  Provide complete visibility  Tracking  Alerting 70
  • Goals of IT in SCM (2/3)  Access any data in the system from a single point of contact. This is complicated by the fact that one may need information which resides  in various locations within one company  in different companies 71
  • Goals of IT in SCM (3/3)  Analyze and plan activities based on total supply chain information.  Decision Support Systems  Advanced Planning Systems 72
  • How are these Goals Achieved? 1. Standardization 2. Infrastructure 3. Electronic Commerce 4. Supply Chain System Components 5. Integration-related issues 73
  • 1. Standardization  various forces are making this happen market forces interconnectivity reduced costs in software Internet-based standards economies of scale Examples: email, EDI       74
  • ERP System Providers  SAP  Oracle  J.D. Edwards  PeopleSoft  Baan 75
  • 2. Infrastructure  The software and hardware around which the IT system is built  Components include  hardware interface/presentation devices: PC, voice mail, terminals, Internet devices, PDAs anywhere, anytime graphical display Wintel standards vs. Java standards 76  communicatons: email, EDI, groupware,
  • 3. Electronic Commerce  The replacement of physical processes with electronic ones  The creation of new models for collaboration between customers and suppliers  Examples include: 77
  •  Taxonomy:  level 1: one-way communication: email, FTP, browser  level 2: database access: inquireies, forms, purchasing, tracking  level 3: data exchange: EDI, clearinghouse  level 4: sharing processes: CRPT, business communities, VCI 78
  • 4. Supply Chain Component DSS for Supply Chain Processes:  Demand planning tools  Supply Chain Design  Production planning  Distribution planning  Transportation planning 79
  • 5. Integrating Supply Chain IT  Manugistics’s Model: Supply Chain Compass  Stage I: Fundamentals - focus on quality  Stage II: Cross-functional teams - serve customers  Stage III: Integrated Enterprise - drive business efficiency  Stage IV: Extended supply chain - create market value  Stage V: Supply chain communities: be a market 80 leader
  • ISSUES: What’s New in Logistics?  Global competition  Shorter product life cycle  Increasing product variety  New, low-cost distribution channels  More powerful well-informed customers 81
  • ISSUES: What’s New in Logistics?  New communications and information technologies POS and EDI technology  Wireless technology  Decision Support Systems  Integrated systems  Multi-modal transportation 82
  • ISSUES: What’s New in Logistics?  New concepts in logistics  Push Vs Pull strategies  Cross docking  Strategic alliances  Manufacturing postponement  Design for Logistics 83